Financing Constraints, Export Decisions, and Aggregate productivity

We develop a dynamic industry model with heterogeneous firms and we analyse how financing frictions affect export decisions and industry equilibrium. We show that, in the presence of costly bankruptcy, future expected financing frictions have a strong impact on current export decisions. We use this model to analyse firm dynamics in a sector that opens up to trade. We show that future expected financing problems interact with firm characteristics and have a significant impact on capital reallocation and industry productivity following a trade liberalisation. In particular, the model predics that financing constraints significantly reduce the aggregate productivity gains induced by trade liberalisation, not because fewer firms export, but because the selection into export is distorted by the presence of financing frictions. In the second part of the paper, we verify the main predictions of the model with a rich dataset of Italian manufacturing firms for the period 1995-2003. The results show that financing constraints are an important determinant of the decision to export and that they interact with firm productivity and risk. Using an instrumental variable approach we show that both binding and expected financing constraints affect the decision to export. [email protected], Pompeu Fabra University, Department of Economics, Room 1E58, Calle Ramon Trias Fargas 25-27, 08005, Barcelona, Spain; and [email protected], Room A450, Department of Finance, London School of Economics, Houghton Street, London WC2A 2AE, U.K.